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SHAREHOLDER ACTIVISM INTHE US BANKING INDUSTRY
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REPRINTED FROM:RISK & COMPLIANCE MAGAZINE
JAN-MAR 2016 ISSUE
www.riskandcompliancemagazine.com
Visit the website to requesta free copy of the full e-magazine
Published by Financier Worldwide [email protected]
© 2016 Financier Worldwide Ltd. All rights reserved.
2 www.riskandcompliancemagazine.comRISK & COMPLIANCE Jan-Mar 2016
HOT TOPIC
HOT TOPIC
SHAREHOLDER ACTIVISM IN THE US BANKING INDUSTRY
www.riskandcompliancemagazine.com 3RISK & COMPLIANCE Jan-Mar 2016
HOT TOPICSHAREHOLDER ACTIVISM IN THE US BANKING INDUSTRY
Tim Main is a senior managing director in Evercore’s corporate advisory business, focused on banking and specialty finance institutions. Prior to joining Evercore in 2011, Mr Main spent 23 years at JPMorgan Chase and was most recently Head of North American FIG and Co-Head of Global FIG. Prior to running FIG, he ran JPMorgan’s Equity Capital Markets group. At Evercore, Mr Main has worked on several significant advisory assignments in the depository/specialty finance sector, including advising M&T on the acquisition of Hudson City and multiple transactions by Ally Financial.
Tim Main
Senior Managing Director
Evercore
T: +1 (212) 849 3520
Jason Frankl is a senior managing director and leads FTI Consulting’s Activism and M&A Solutions practice. His practice includes working with companies that are the subject of shareholder activism and/or hostile M&A activity where he develops and implements strategies that are designed to maximise shareholder value. Most recently, Mr Frankl and his colleagues supported Allergan in its successful defence involving Pershing Square and Valeant Pharmaceuticals, and Perrigo in its successful defence involving Mylan’s hostile takeover bid. Prior to joining FTI Consulting in 2004, Mr Frankl was counsel to the NASDAQ Stock Market where he drafted and interpreted NASDAQ’s modern corporate governance rules, among other things.
Jason Frankl
Senior Managing Director
FTI Consulting
T: +1 (202) 312 9216
Arthur B. Crozier is chairman of Innisfree M&A Incorporated of New York and of Lake Isle M&A Incorporated, Innisfree’s wholly-owned UK subsidiary. Mr Crozier’s practice includes the representation of US and international clients in a wide variety of transactions and proxy contests, as well as annual and special meetings. In addition, he counsels an international roster of clients on corporate governance and executive compensation issues. Mr Crozier has written numerous articles and spoken extensively on the subjects of corporate governance, executive compensation, proxy contests, hedge fund activism and international voting practices.
Arthur B. Crozier
Chairman
Innisfree M&A Incorporated
T: +1 (212) 750 5837
David C. Ingles serves as co-head of Skadden’s Financial Institutions Group. Mr Ingles has a diverse corporate practice representing clients on mergers, acquisitions and divestitures, corporate finance transactions and general corporate matters involving financial institutions. He has advised public and private financial institutions in negotiated and contested mergers and acquisitions, proxy contests, joint ventures, spin-offs, equity and debt offerings, and other complex corporate transactions. Mr Ingles also regularly advises private equity firms and others seeking to invest in financial institutions.
David C. Ingles
Partner
Skadden, Arps, Slate, Meagher & Flom LLP
and Affiliates
T: +1 (212) 735 2697
4 www.riskandcompliancemagazine.comRISK & COMPLIANCE Jan-Mar 2016
HOT TOPICSHAREHOLDER ACTIVISM IN THE US BANKING INDUSTRY
R&C: Could you provide an overview of shareholder activism in the US banking industry? What overarching trends have you seen in this space during the last 12-18 months?
Main: Historically, activist activity in the
US banking industry has been relatively light
compared to other industries. The industry is
heavily regulated and highly complex operationally,
limiting the potential methods for an activist to
create shareholder value. Traditionally, activity
was concentrated in a few dedicated funds
which agitated for the sale of smaller banks to
generate outsized returns via M&A vs. operational
enhancements or capital restructuring. As US
banks remain mired in a challenging operating
environment, characterised by low interest rates,
fierce competition and heightened regulatory costs,
there has been a strong return of bank M&A among
the smaller institutions and with it, an increase
in activist activity targeting underperforming,
many times sub-scale banks. Additionally, in the
new ‘too big to fail’ environment of higher capital
requirements and increased regulatory costs
for larger institutions, there have been select
opportunities to target larger banks that could
enhance profitability by divesting underperforming
or capital intensive subsidiaries, or reducing the size
of certain business lines such as investment banking
to return capital to shareholders.
Crozier: There has been an increase in activity at
banks generally in the last 12 to 18 months. There
are a number of activists that have long targeted
smaller banks and they have been picking up
their efforts generally, as well as targeting larger
banks, such as Webster Financial, which has a
market cap of $3.4bn. We believe the pick-up in
activity is largely attributable to the expected wave
of consolidation in the sector. Larger banks are
not immune from activist pressure. Trian Partners
targeted Bank of New York Mellon and succeeded
in gaining a seat on the board. The presence of a
Trian director, however, did not prevent another
activist, Marcato Capital, from launching an activist
campaign at the bank. Responding to a different
form of investor activism, Bank of America decided
to submit its recent decision to recombine the
offices of chairman and CEO to a shareholder vote
due to shareholder dissatisfaction that the change
was not included on the agenda at the 2015 Annual
Meeting of Stockholders. In a related sector, activism
has escalated dramatically at business development
companies due to lagging stock price performance
and allegations of excessive fees.
Frankl: We have noticed a definite increase in
the number of activist campaigns targeting US
financial institutions, which includes US banks. Due
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HOT TOPICSHAREHOLDER ACTIVISM IN THE US BANKING INDUSTRY
to increased regulatory burdens, smaller banks have
become more attractive to activists pushing a ‘sell
the company’ agenda. Since 2014, there have been
significantly more campaigns targeted against banks
with less than $1bn in market cap in the financial
sector than their large cap counterparts. A vast
majority of these new campaigns have related to
closed end funds, BDCs and smaller banks, although
large banks have not been sheltered completely.
Trian settled for a board seat at Bank of New York
Mellon in late 2014. Months later, in early 2015,
another activist targeted BNY Mellon, calling for
a change in CEO. Both BNY Mellon and Citi Group
were also subjected to successful proxy access
campaigns in 2015, as well as Bank of America
which prevailed in a bid to separate the chairman
and CEO roles.
Ingles: Shareholder activism in the banking
industry has become the subject of widespread
media coverage and is increasingly becoming a
focus of bank management and boards of directors.
Much of the activist activity that we have seen in the
industry has involved a handful of investment funds
focused on opportunities in the sector and that are
dedicated exclusively or primarily to investments
in the banking industry. From time to time we also
have seen situations involving more high-profile
activist investors, such as Nelson Peltz, who now has
a representative on the board of Bank of New York
Mellon. While the number of observable instances
of activism in the industry likely is not sufficiently
large to reach many meaningful conclusions about
observable trends, we believe activism generally is
on the rise in the industry and will continue to be,
and we believe activist shareholders have had and
will continue to have increasing success in agitating
target banks for a sale as the market for bank
mergers and acquisitions continues to become more
robust.
R&C: How does shareholder activism in the banking sector compare to activity in other sectors? Have you seen a definite increase in activism targeting financial institutions – and if so, why?
Frankl: Due to the highly regulated nature of
the banking industry, the opportunity for activist
activity is narrower than in other industries. Some
‘generalist’ funds have agitated for a variety of
economic changes including the spinning-off or
sale of underperforming business lines or increased
dividends, most of which are not specific to the
banking industry at all. Most of the small to mid-size
banks that activists target have fairly straightforward
balance sheets as compared to larger banks, making
it less likely that an activist would push for more
classic economic activism outside of calling for a
sale of the bank. This leaves corporate governance
activism or proxy access campaigns as the most
common type of activism in that realm of the
6 www.riskandcompliancemagazine.comRISK & COMPLIANCE Jan-Mar 2016
HOT TOPICSHAREHOLDER ACTIVISM IN THE US BANKING INDUSTRY
banking industry. Lastly, we are seeing increased
activist activity in less regulated financial institutions
such as BDCs and closed end funds, as well as REITs.
Main: The banking sector is distinct from other
industries in a variety of ways but the most relevant
factors impacting the level of activism
are that the sector is heavily regulated
with myriad safety and soundness and
capital requirements. As a result, capital
returns, operational risks and balance
sheet flexibility face substantial regulatory
scrutiny, and ‘control’ investments
representing greater than 10 percent
ownership are subject to regulatory
approval. Additionally, the business model
is highly complex, limiting opportunities
for ‘easier wins’ from operational and
capital structure improvements. For these
reasons, most bank activists have pushed for a sale
vs. targeting other value enhancing strategies they
might in another industry. Since bank M&A in recent
years has been concentrated with smaller banks,
where buyers are more abundant and regulatory
scrutiny less stringent, so has activist activity in
the sector. There has been a distinct increase in
activism as remaining independent becomes more
challenging for sub-scale institutions. With revenue
under pressure and costs increasing, one of the
only ways to earn appropriate returns is to spread
increased costs over a larger asset base, driving
consolidation.
Ingles: Our view has been that activist investors
generally have fewer options in their playbook when
targeting a bank than when targeting companies
in other industries, due to the relative simplicity
of the business model of most community and
regional banking institutions as well as the industry’s
complex regulatory framework, which affects both
the operational and financial flexibility of the bank
itself as well as the degree to which one or more
investors are legally permitted to take actions that
affect control of a banking institution. These factors
limit the opportunities available to the activist to
propose many of the value-enhancing transactions
or initiatives that it might seek to implement in the
ordinary course, such as splitting up the company
David C. Ingles,Skadden, Arps, Slate, Meagher & Flom LLP
“Activist investors generally have fewer options in their playbook when targeting a bank than when targeting companies in other industries.”
www.riskandcompliancemagazine.com 7RISK & COMPLIANCE Jan-Mar 2016
HOT TOPICSHAREHOLDER ACTIVISM IN THE US BANKING INDUSTRY
or disposing of non-core businesses, utilising
excess capital more profitably, or returning it to
shareholders, effecting a leveraged recapitalisation,
or even in some cases reducing the company’s
expense base. However, despite these limitations,
we do believe we are seeing more instances
of shareholder activism in the banking industry
recently, and we believe the major reason for this is
that the main end-game of activism in the banking
industry – agitating for a sale of the institution – has
become more viable.
Crozier: As a general matter, activism in the
banking sector has been subdued compared to that
witnessed in other sectors. This is thanks, in large
part, to the layers of regulation on a state and federal
level that can significantly hamper an activist’s ability
to achieve a board seat, the essential objective for
an activist seeking real change at a bank. In addition,
the usual activist playbook in other sectors, such as
breaking up the company, or undertaking large buy-
backs or dividend programmes, aren’t applicable
to small and mid-sized banks. Consequently, even
if an activist’s publicly expressed agenda is to cut
expenses, improve efficiency or other operational
objectives, the real goal is usually to seek the sale
of the bank at a premium, since that is the only way
to make a meaningful profit on their investment in a
short-term investment horizon. The expected wave
of consolidation in the sector to increase scale due
to Dodd-Frank and increased regulation generally is
likely driving the increase in activism. For example,
activist investors Basswood and PL Capital pressured
Metro Bancorp to sell to FNB last summer.
R&C: Have any particular activist campaigns in the US banking arena caught your eye? What lessons can we draw from their outcome?
Crozier: The Bank of New York Mellon and Bank
of America experiences demonstrate that no bank
is immune due to size or complexity and that banks
are vulnerable on a variety of fronts. At Bank of
New York Mellon, the agreement to seat a director
from one of the most prominent activist investors,
Trian Partners led by Nelson Pelz, did not prevent
another activist, Marcato Capital Management led
by Mick McGuire, a former lieutenant of Bill Ackman
at Pershing Square, from also targeting the bank
subsequent to the settlement with Trian. At Bank
of America, the level of discontent by shareholders
because they were not given the opportunity to
vote on the combination of the chairman and
CEO roles demonstrates the increasing shift to a
shareholder-centric model of corporate governance
in which institutional shareholders zealously
guard their perceived prerogatives. This shift is
equally applicable to banks as in other sectors.
When given the chance to vote on the issue at the
September Special Meeting, however, stockholders
overwhelmingly approved the change.
8 www.riskandcompliancemagazine.comRISK & COMPLIANCE Jan-Mar 2016
HOT TOPICSHAREHOLDER ACTIVISM IN THE US BANKING INDUSTRY
Ingles: All activist campaigns are by definition
unique in some way, given the different players and
facts in any given case, so it is difficult to focus on
any one case as emblematic of any characteristics
or trends for activism in the banking industry
generally. Some recent cases involving relatively
larger banking institutions have resulted in publicly-
announced sale or merger transactions, with varying
degrees of receptivity to those deals in the market.
These recent cases point to the increasing viability of
a sale or merger proposal as an activist tactic in the
banking industry, and they also sound a warning to
bank managements and boards across the industry
that preparedness for shareholder activism should
be a top-of-mind concern for them as they manage
their institutions through persistently difficult
regulatory, industry and economic conditions.
Main: Basswood Capital Management’s activist
position in Astoria Financial. Basswood, a well-
respected bank investor with a track record of
inducing underperforming banks to sell, announced
an approximate 9 percent stake in Astoria Financial
in early August of 2015. Astoria Financial, a $15bn
asset New York City-based bank, was a rumoured
sale candidate given its attractive markets and low
levels of profitability, but was focused on remaining
independent. By late fall of 2015, approximately three
months after the announcement of Basswood’s
stake, Astoria sold to New York Community Bancorp.
The speed in which Basswood prompted a sale
was particularly interesting, considering Astoria’s
preference for independence. Basswood achieved
similar successes previously, but with substantially
smaller banks. This campaign could serve as a
bellwether for activism at larger underperforming
banks as M&A returns to this market cap spectrum.
The Astoria transaction demonstrates these larger
institutions may be subject to the same activist
playbook formerly reserved for smaller banks.
Frankl: The May 2013 board meeting was an
eventful one for JP Morgan. A collection of corporate
governance activists suggested the company require
an independent director to take the position as
chairman of the board, however the activists were
ultimately refuted and Jamie Dimon maintained his
position as CEO and chairman. Another notable
settlement involved Trian attaining a seat on the
BNY Mellon board, which appeared to ultimately
result in the announcement of a significant stock
buyback. This type of activism is far less common
than corporate governance activism in the financial
sector. The greatest takeaways are that corporate
governance activists have done a pretty good job of
getting substantial media attention by concentrating
their efforts on industries, such as banking, which
may suffer from lingering PR issues from the
financial crisis.
R&C: If a bank operating in the US finds itself subject to shareholder activism,
www.riskandcompliancemagazine.com 9RISK & COMPLIANCE Jan-Mar 2016
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what general steps should it take to address the issue? What role should the board play in these circumstances?
Ingles: The proper course of action for the bank
in any given case will depend on the facts and
circumstances of the case, but the best course
of action for any institution is to begin preparing
today by taking steps that may have the effect
of addressing typical activist investor
concerns before an activist investor gets
involved or takes its case public. But once
an activist investor has taken a position
in the company’s stock and has begun
publicly or privately agitating for change
within the institution in some manner,
the company generally will need to take
steps to address this development,
including at the board of directors, even
if the company ultimately concludes that
the best course of action would not be
to engage in an active dialogue with the
activist or not to implement any of the
actions being proposed by the activist. Because the
activist agenda generally is to improve shareholder
value by implementing one or more suggested
proposals, this agenda typically will implicate the
company’s financial performance, its business
model or its strategic direction and consideration
of strategic alternatives, all of which are matters for
review by and direction from the company’s board
of directors. Banks that are the subject of an activist
campaign generally will want to have a plan in place
to review and analyse the proposals being put forth
by the activist investor and to respond directly to
the activist regarding its proposals, as well as, if the
activist campaign is public, to address the activist
campaign publicly and with the company’s various
constituencies.
Frankl: Even with the best shareholder
engagement, activist aggression is not always
preventable. If private conversations with activists
fail to achieve a mutually agreeable result and the
activist does initiate a campaign, senior management
and the board of directors must immediately assess
their options in order to best position the company
Jason Frankl,FTI Consulting
“Corporate governance activists have done a pretty good job of getting substantial media attention by concentrating their efforts on industries, such as banking.”
10 www.riskandcompliancemagazine.comRISK & COMPLIANCE Jan-Mar 2016
HOT TOPICSHAREHOLDER ACTIVISM IN THE US BANKING INDUSTRY
to convey its message. The board plays a key role in
this type of defence, as they must, in essence, show
their work to the investment community. In any
type of activist campaign, ultimately shareholders
are voting on whether change in the boardroom is
necessary. It is vital that the investment community
understand the reasons behind the decisions made,
so they have confidence in the procedures and
credibility of the current board and conclude that
change is not necessary.
Crozier: As a general matter, banks confronted
by an activist need to take the same steps as
other companies. Namely, they should track the
trading in the stock to determine if other activists
are coming in to the stock and forming a ‘wolf
pack’, candidly assess existing shareholders’
views to determine the likely outcome of a proxy
contest, develop an outreach programme to key
investors and influencers to ensure that the bank’s
strategy to deliver shareholder value is credible
and understood, and take appropriate actions that
respond to the activist’s concerns, without appearing
to be defensive and simply reactive. Directors
increasingly play an important role, particularly in
outreach to index and quantitative investors who do
not have in-depth knowledge of the bank. Many of
those investors want to be assured that shareholder
concerns are taken seriously at the board level.
Directors also play an important part in discussion
with the proxy advisory firms in the case of a proxy
www.riskandcompliancemagazine.com 11RISK & COMPLIANCE Jan-Mar 2016
HOT TOPICSHAREHOLDER ACTIVISM IN THE US BANKING INDUSTRY
contest. In addition, a bank should also reach out to
its regulators as soon as possible to notify them of
the activist and its proposals and should seek advice
from counsel as to the impact of the regulatory
scheme on the activists and its ability to achieve its
goals.
Main: In reacting to activism, banks are not
unique, and an activist’s outreach should not be
ignored. The CFO or CEO should return an inbound
call, and primarily listen to ascertain the thesis.
Thereafter, to adequately prepare for a potential
contest or negotiation, the company should identify
an internal working team, with a focused leader to
synthesise information from the full adviser team
and empowered to make decisions. Management
should receive regular updates and participate
in pivotal decisions, but retain latitude to run the
business because driving shareholder returns
and operational efficiencies can mitigate most
critiques. It’s also critical to deliver consistent and
effective messaging, including concise articulation
of the corporate strategy and crafted to actively
rebut criticisms, and maintain regular shareholder
dialogue including active managers and corporate
governance and proxy voting professionals at
passive asset managers. The board should be
briefed regularly, often weekly, consulted on
key decisions – including whether to pursue a
settlement – and participate in a proxy contest by
12 www.riskandcompliancemagazine.comRISK & COMPLIANCE Jan-Mar 2016
HOT TOPICSHAREHOLDER ACTIVISM IN THE US BANKING INDUSTRY
communicating with shareholders and advisory
firms.
R&C: In your opinion, how important is it for banks to prepare detailed contingency plans before they are targeted by activists? What areas of their business do they need to continually assess for potential weaknesses?
Main: It is critical for a bank to continually review
its business from the outside looking in and develop
a contingency response plan for possible activist
agitation. Most boards conduct regular strategic
reviews, however they often exclude ideas that are
more evident to outsiders. In this regard, boards
should proactively and objectively analyse the
viability of any alternative relative to the status
quo from a shareholder’s perspective as a matter
of good corporate governance. Doing so places
the company in a position of strength. Ideally, no
board or management team should be blindsided
by a proposal that has not already been internally
vetted, even if Regulation FD precludes an initial
substantive comment. Often external parties think
more creatively and boards should be open to fresh
perspectives and not shy away simply to avoid
the appearance of weakness – receipt of credit is
less important, whereas driving shareholder value
is paramount. The typical bank activist campaign
attempts to target an institutions’ financial or market
underperformance relative to peers and, as a
corollary, suggest the bank should ‘assess strategic
alternatives to maximise shareholder value’. This
tactic is effectively asking the bank to sell for a
premium. As such, banks should be consistently
conducting a review of their competitive positioning
and strategic alternatives, understanding how
their operational performance stacks-up versus
peers, both currently and in the future, as well as
evaluating the M&A landscape to justify whether
their independent strategy is a superior proposition
for shareholders.
Frankl: It is important for banks, particularly
large banks, to understand how voting decisions
are made by its institutional investors, including
pension funds and unions, especially when it relates
to corporate governance issues. Ongoing monitoring
of shareholder positions, whether large or small
is, critical. This should be accompanied by routine
perception audits. It is also important for the board
to periodically view the bank, as well as its related
financial services businesses, through an activist’s
eyes. This self-assessment should include a review
of all public disclosures and statements made to
investors and the media to evaluate consistency and
follow-through. The board should also periodically
review activist campaigns to better understand the
areas being explored by activists at competitors, and
whether the bank may have similar vulnerabilities. In
cases where vulnerabilities are found, detailed plans
www.riskandcompliancemagazine.com 13RISK & COMPLIANCE Jan-Mar 2016
HOT TOPICSHAREHOLDER ACTIVISM IN THE US BANKING INDUSTRY
should be created to address those vulnerabilities.
If that is not possible in the near term, proactive
communications plans should be created to enable
investors to understand its business purpose. Banks
also need to know which activists are targeting
their industry. They should not only know the track
records of those activists, but also the
playbook, governance history and returns
generated by those entities where these
activists successfully attained a board
seat. Considerations should include an
assessment of all issues the targets
experienced after the activist obtained
board representation, particularly in the
legal and reputational areas.
Ingles: The best preparedness plan
for activism for any banking institution
is to develop a strong business model
and strategic plan on a standalone
basis, before any activist investors surface, so as
to ensure that the institution is being managed in
a way that seeks to maximise its value and returns
to its owners. Companies can be proactive in
addressing the likely agenda of any activist investor
by continually analysing and seeking to improve
operational performance and share price, by
developing and implementing a long-term strategic
plan, including regularly reviewing and analysing the
company’s strategic alternatives for enhancing value
to shareholders, and by regularly communicating
this performance and plan to and building stronger
relationships with its significant investors. Doing
so can result in the institution already having
considered any plan or course of action that
may be proposed by an activist if and when one
surfaces. Of course, this may include analysing
the possibility of a merger or sale as one strategic
alternative available to the institution, including the
value reasonably achievable in such a transaction
and the risks and contingencies associated with
negotiating, announcing and completing such a
transaction. Banks also should have in place a plan
to more directly anticipate, identify and respond
to activist investors when they surface, including
a programme to monitor activity in its stock and a
contingency plan for coordinating a team both within
the institution and among its outside advisers to
Tim Main,Evercore
“External parties think more creatively and boards should be open to fresh perspectives and not shy away simply to avoid the appearance of weakness.”
14 www.riskandcompliancemagazine.comRISK & COMPLIANCE Jan-Mar 2016
HOT TOPIC
review any activist proposals and to respond to them
– including publicly if appropriate – in an effective
manner.
Crozier: To assess and mitigate their vulnerability
to an activist campaign, it is vital for banks to
prepare a detailed contingency plan that ideally
starts before the activist appears. Among other
things, the contingency plan needs to
identify the issues an activist is likely
to target and lay out the alternatives to
address those issues to the fullest extent
possible. In any activist situation, the
credibility of the management and board
is key to a successful outcome, so it is
important to ensure that shareholders
feel that the bank’s leaders are aware of
any issues that impede shareholder value
creation and are taking effective steps to
address those issues, even if the ultimate
resolution is long-term. No company can
build that level of credibility if it starts the necessary
communication and engagement only after a proxy
contest has begun.
R&C: In today’s market, where there is a clear drive toward transparency and accountability across the financial services sector, what is your advice to banks on maintaining an effective shareholder communications strategy?
Crozier: An effective shareholder communications
programme which demonstrates that the board
and management team is executing on a well
thought-out, credible strategy to deliver robust
shareholder value, even if not on a short-term
investment horizon, is critical to deterring an activist
in the first place and to fending off any activist that
does appear. In the banking industry, transparency
is critical for any such strategy to be viewed as
credible. Similarly, accountability is critical to
maintaining credibility if the strategy fails in whole or
in part.
Ingles: We consistently advise that regular
periodic communication with shareholders regarding
the company’s financial position and outlook and its
strategic direction is a recommended best practice
for public companies in all industries, not just banks.
Arthur B. Crozier,Innisfree M&A Incorporated
“To assess and mitigate their vulnerability to an activist campaign, it is vital for banks to prepare a detailed contingency plan that ideally starts before the activist appears.”
SHAREHOLDER ACTIVISM IN THE US BANKING INDUSTRY
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HOT TOPICSHAREHOLDER ACTIVISM IN THE US BANKING INDUSTRY
Ensuring that the institution’s largest investors
understand the company’s financial condition, its
business model, its strategic direction and outlook
and risks involved in managing towards those goals,
and that those investors also have an opportunity
to engage in a dialogue with managers about these
matters, can be the best way to address the types of
concerns that activist investors typically raise if and
when they surface.
Frankl: Banks need to pay even closer attention
to shareholder engagement and sentiment than
most industries. Fortunately, many banks do an
excellent job of maintaining a great dialogue with
shareholders; however, often more can be done.
Independent feedback through anonymous surveys
to institutions and other large investors is a great
way to receive credible and unfiltered feedback on
whether the bank’s messaging is being received as
intended. This feedback should be presented directly
to the board.
Main: Given the level of regulatory scrutiny in
the banking sector, transparency and accountability
have become paramount across the industry.
In this environment, an effective shareholder
engagement strategy that features a consistent
message to shareholders and analysts is critical
to maintaining an open dialogue with investors. By
capturing and responding to investor feedback,
management teams can potentially avoid blindspots
that an activist might exploit. The company can
also create goodwill with its key holders by
adopting certain governance or other policies that
can carry favour in a proxy contest should one
arise. An honest assessment of the company’s
performance on several dimensions, including TSR,
operating performance and balance sheet relative
to expectations is important to understanding
how the company is perceived and measured by
shareholders. Utilising this information as a basis for
shareholder communications will help to maintain an
effective dialogue with the investment community.
R&C: Looking ahead, do you expect to see more shareholder activism targeting the US banking industry? What do you believe banks need to do in response to this growing trend?
Frankl: Activism targeted towards smaller to
mid-size banks will persist as it has throughout the
recent past. As long as activists can find weaknesses
in business operations and strategies, or an opening
to push for the sale of a smaller bank, this pattern
will continue. To respond to this, these banks and
financial institutions need to be diligent in monitoring
who they speak with at conferences, all participants
on investor conference calls and also which activists
are active in the industry. Our independent survey of
activist investors, done in conjunction with Activist
Insight, has shown that most will begin researching
16 www.riskandcompliancemagazine.comRISK & COMPLIANCE Jan-Mar 2016
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possible targets up to a year before making an
investment. Furthermore, investors in our survey
overwhelmingly believed that assets allocated to
shareholder activism would continue to increase.
Concurrently, 86 percent of the funds we surveyed
expect to engage in new capital raising over the next
12 months in order to put these funds to work and
generate competitive returns for investors.
Main: Broadly, we continue to see an increase in
the flow of funds into the hands of activist investors
given this has become an asset class of its own over
the years. Activist returns have outpaced the MSCI
since 2008, which has attracted new investors over
the last few years at an approximate 25 percent
CAGR from 2010 through mid-2015 and is estimated
at over $130bn in publicly-identifiable AUM.
Specifically, the banking sector is highly competitive
and outsized returns are generally driven through
M&A, particularly in this challenging operating
environment where many smaller banks don’t earn
their cost of capital. As such, activism has increased
as M&A remains a key investment thesis in both
perceived buyer and perceived seller bank stocks.
Banks should prepare for an approach similar to
companies in other sectors utilising best practices.
As a regulated industry, an approach can be more
difficult and tactics are more limited in what an
activist can exploit, but banks are by no means ‘off
limits’ to an approach.
Crozier: Now that hedge fund activism is an asset
class, no industry or company can be considered
completely immune from activism. We expect to
see increasing activism in the banking industry, in
particular. The prospect of significant short-term
profits from M&A activity in the sector will be a
powerful lure for activists that have not previously
been involved in financial institutions. Banks need to
be aware that they are vulnerable and identify the
specific areas of vulnerability. They need to engage
effectively with their shareholders by communicating
a well thought-out, credible strategy to deliver robust
shareholder value, albeit not necessarily in the short-
term, and demonstrate that they listen and respond
to the concerns of their shareholders.
Ingles: We do believe that we will see increasing
incidences of shareholder activism in the sector in
the future. And we believe banks should seek to pre-
empt any activity in their own institutions by taking
the preparatory steps outlined above to address
typical activists concerns before an activist surfaces
and to be best prepared to mobilise to respond to
any activist campaign that arises. RC&
SHAREHOLDER ACTIVISM IN THE US BANKING INDUSTRY